Splitting equity is an art and not science. One thing that should be kept in mind before splitting is – split the shares without giving away the company. You never know what your co-founder will do in a span of months whether he decides to walk away from the company and still retains the large portion of the company. It will be like giving the value of your hard work to a person who doesn’t contribute to your success. Some of the points are already discussed above; a few more important factors that need to be considered before splitting.
Don’t Let Emotions Overcome Your Intelligence
Our co-founders are generally our friends or family member to whom we have lot of attachment. We love them and, hence, we always get carried away by our emotions when it comes to any decisions related to them. Make sure, you don’t do this when it comes to splitting the equity. You have to think rationally outside your emotions. You have to put that extra effort to take that decision of equity split.
Vest All Shares
Vesting of shares means that the founder will have to earn the equity shares as per the criteria mentioned in the agreement. Furthermore, if you don’t have any agreement then get one. Irrespective of the divide, all the shares must be subject to vesting restriction. In India, vesting clause is not very common and hence people start the business merely on the faith that everything will go fine. But, it is always advisable to get things done on papers.
Focus Should Be On Value Addition
Value addition should always be the criteria on which every decision must be based. You don’t need to compensate the time, but you must compensate for value. Value should be rewarded always. In the startup era, we always reward ESOP-based on hard work. But, this shouldn’t be the criteria. Getting the thing done is far important than working hard. Hence, even if you are thinking of granting ESOPs to the employee, grant only if you see the skill that can add value to your startup.
Importance Of Co-founder’s Role
The equity split must also be based on your role as key personnel must get the premium over the non-key personnel. You may also prepare a table like out of my 10% pool, % are for C grade employee and rest 2% for CTO/CEO/COO and 1% alone for the directors. You may prepare the table as per your wish.
Number Of Founders: Once the founder of Amazon said “If you can’t feed your team with two pizzas, then its too large.” rather I would say, if it comes to founders, don’t make it more than 3. Two or three founders are more than enough.
A List Of Pointers
Even if you are still confused, then you may use the following pointers and discuss between the founders and your team. Give proper attention to every pointer and decide the equity sum accordingly. Here is the list of pointers: